Read Your Way to Wealth This Summer

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Last week, I embarked on a summer project of recommending books specifically chosen to appeal to the tastes and preoccupations of the wealthy. For this week's installment we'll keep it simple. Surely the No. 1 taste and preoccupation of the wealthy is making money. I bet we can find some books about that.

Now I am not, as these things go, a wealthy person. Possibly related: My view of how to become wealthy is rather childish. The ideal is something like: Go to the right schools, discover some fantastic arcane skill, and use it to make the world give you everything you could desire without having to, like, show up at work every day.
(This is sort of how I imagine hedge funds operate.)

Coincidentally one of the books I'm most looking forward to this summer is Lev Grossman's The Magician's Land, which I haven't read (it's out Aug. 5), but which is the end of a trilogy including The Magicians and The Magician King, so you can catch up on those while you wait. These are weird books sometimes described as "Harry Potter for grown-ups": They're the story of some young people who meet in a wizarding college and then go off into the world to, um, wizard. Some of the action occurs in a Narnia-like fantasy world, but what I really like is the texture of what it would be like to have magic in our actual modern world. Grossman's magicians magic themselves rich, have adventures, avoid jobs, and generally do the sort of fabulous leisure activities that I would do if my undergraduate training was in wizarding rather than Greek literature. But they suffer, too, in ways both epic and petty; an unsettling message of these books is that material ease and power can only go so far to insulate you from life's disappointments.

Outside of magic, what are the best ways to make money? I think a rough list, in descending order of pleasantness, would be:

Doing nothing

High finance

Natural resource extraction

Hard work and moxie

Now there are not a lot of good books about making money by doing nothing. I mean, there are lots of books like that -- "Achieve Unfathomable Wealth by Looking at Your Computer for 3 Minutes a Day" or whatever -- but I have my doubts as to their quality. But as it happens, this year saw the publication of a very well received book on the topic. Thomas Piketty's Capital in the Twenty-First Centuryargues that the natural rate of return on capital exceeds the expected growth rate of the economy, and that therefore capital will grow faster than incomes. This means that those who have capital will keep getting more capital, while those who don't will fall ever further behind.

You may have heard of this book? It's gotten some attention, most of which reads it as pretty gloomy. And it is, if you don't have capital. On the other hand! The moral of the story for those who are already well provided for is rather cheerier: Things will only get better! Your capital will grow, unruffled by the vagaries of the market, while labor becomes ever cheaper. Your small fortune will become a vast one; your live-in nanny will become an army of servants with fans and grapes and other clichés of decadence. Really what is not to like?

The contention that capital will inherently grow over time and immiserate labor until it sparks violent revolution has been controversial ever since Piketty's book came out, and also for the previous 147 years. I will mostly spare you the controversy, though if you prefer not to be spared you know where to look.

A subcategory of making money by doing nothing is making money by inheritance, which usually does not require much effort on your part. Usually but not always! A recent fun read on inheritance is Simon Winder's Danubia, about the 500ish years of mischief that the Habsburg dynasty got up to in Central Europe and points further afield. It combines gossipy history of the dynasty with Central European travel writing, making it a good vacation read. Not all of the Habsburgs managed to inherit by way of natural causes; a lesson here is how much of a headache a vast hereditary fortune can be. Also, this story more or less does end in violent overthrow, so that's something to ponder too.

Okay, next, high finance. Here, I mean, come on, there are a lot of books about making money in high finance, go read them, I don't know. Two that I've liked recently are Kevin Roose's Young Money, about young people ruining their lives at investment banks, and Turney Duff's The Buy Side, about Turney Duff ruining his life at hedge funds. But these are more cautionary tales than beachy celebrations.

For upbeat high finance, it's hard to beat ... Piketty again? Another cheery-in-certain-circles takeaway from his book is that high finance is great. In particular, Piketty argues that a driver of inequality is that those with bigger fortunes pay more for investment advice, and so get better investment advice and higher returns. This is great advertising for the guys being paid for investment advice. A key data point here
is the fact that, from 1980 to 2010, the biggest university endowments (Harvard, Yale and Princeton) had higher returns than merely big endowments, which in turn had higher returns than small ones. The more money you had, the more you could pay for management, the more "alternative" investing you did, and the more money you made. Recent mediocre performances by hedge funds and private equity funds and Harvard seem to have missed the cutoff for his data.

Next up is the accumulation of wealth by exploitation of natural resources. Here it's hard to beat The Luminaries, Eleanor Catton's Booker Prize-winning novel about gold mining in New Zealand in the 19th century. I mean, it's about other things too -- there is astrology, and a love story, and murder, and mysticism, and very subtly considered old-timey language, and a general sense of old-fashioned expansiveness that makes it a fun novel to get lost in -- but there is also plenty of gold mining. I don't think it gives too much away to say that of the plot involves schemes for evading taxation of natural resource extraction, and confusion over the title to stocks of physical metal. The whole thing would not be out of place at a Qingdao warehouse today. Actually "The Luminaries" does feature controversy over the contents of a commodity warehouse in a Chinese port; it is all very modern.

While I have you here, I loved Catton's first book, The Rehearsal, perhaps even more than "The Luminaries," though remember that I'm a pretty weird guy. "The Rehearsal" is much sparer and more metafictional, much less about creating a specific expansive world like the gold rush of "The Luminaries."
But it is a gorgeous examination of how vivid the world is when you're young, and how much it hurts to get older. I feel like this might be a preoccupation of the wealthy too. It's a preoccupation of mine anyway.

That leaves the accumulation of work by hard work and moxie, which is honestly hardly worth mentioning, so let's not. It is summer, let's restrict our reading to money-making of the fantastical variety. There'll be plenty of time for work in the fall.

"Brilliant success without undue application and if possible combined with dissipation was what I admired." -- Alfred Duff Cooper.

Some important lines of attack are:

Return on capital will diminish as capital increases. Piketty addresses this question -- of the elasticity of substitution of capital and labor -- in chapter 6, but not everyone is convinced; today Matt Rognlie posted a paper arguing that Piketty's "inference of a high elasticity from time series is unsound, assuming a constant real price of capital despite the dominant role of rising prices in pushing up the capital/income ratio." Here is Tyler Cowen.

Returns on capital will not be reinvested to build more capital, or not as much as Piketty thinks. Here are Per Krusell and Tony Smith.

The drivers of inequality are technology, globalization and skill, not accumulation of capital. This would be a bummer for those whose plan is to get rich by doing nothing. Here is Larry Summers along those lines.

Table 12.2 on page 448. Figures are average real annual rates of return after fees.

Here is a delightful essay by Catton where she contrasts the two books: "my first novel had not been set anywhere specific, and I wanted to know whether I was up to the challenge of writing a story firmly located in time and space." This quote, meanwhile, has applications beyond literary fiction:

Creative influence can have a positive or a negative charge, either imitative ("I want to try that!") or defiant ("I want to see that done differently"). Both kinds of influence are vital for the health of an idea. Too defiant, and the idea will be shrill; too imitative, and the idea will be safe.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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